La-Z-Boy Reports Fiscal 2009 Second-Quarter Results

Furniture World Magazine

La-Z-Boy Incorporated reported its operating results for the fiscal second quarter ended October 25, 2008. HIGHLIGHTS: -- Net sales for the quarter were $331.9 million, down 9.2% compared with the prior-year period resulting from increasingly difficult macroeconomic conditions which further weakened consumer demand for furniture; -- The company reported a net loss of $53.7 million, or a loss of $1.04 per share, which included a non-cash $0.74 per-share charge for a valuation allowance against the company's deferred tax assets and a $0.04 per-share restructuring charge, primarily related to the closure of the company's Tremonton, Utah and United Kingdom operations; -- For the prior-year second quarter, the company posted a net loss of $9.9 million, or $0.19 per share, which included a $0.11 per-share charge for a write-down of goodwill related to the company's stores in southeastern Florida, a $0.12 per-share charge from discontinued operations, a large portion of which was attributable to intangible assets and liquidating inventory of businesses held for sale, and a $0.01 restructuring charge; Kurt L. Darrow, La-Z-Boy's President and Chief Executive Officer, said: "Over the course of the quarter, we experienced a progressive decline in sales trends, particularly in October, as sales deteriorated in conjunction with the turmoil in the global financial and credit markets. The economic landscape, coupled with the already weak housing market and historically low consumer confidence levels, required us to take aggressive action to realign our operating structure with the current rate of orders. In this challenging environment, we are focused on improving our profitability and, earlier this month, we announced the following initiatives: -- An immediate reduction in our headcount by about 10%, or approximately 850 employees, across all levels of the company, which will result in an annual savings of $16 to $20 million; -- Due to the overall tightening of the financial markets, and our decision to withdraw credit support to certain independent dealers, we anticipate the closure of 15 to 20, primarily dealer owned, La-Z-Boy Furniture Galleries(R) stores over the next 90 to 120 days; -- A significant reduction of our planned fiscal 2009 capital expenditures from about $27 million to approximately $18 million to $20 million; and -- An aggressive reduction of our overall operating expenses and inventories to be in alignment with today's volumes. Over the past several years, we have instituted significant cost-cutting measures while investing in our company to strengthen our operations. We expect these measures, when combined with other initiatives, including the Mexican cut-and-sew center, our new marketing campaign, with expanded national television advertising, as well as a large network of proprietary stores, will assist in positioning us to emerge from this difficult period." Upholstery For the fiscal 2009 second quarter, sales in the company's upholstery segment decreased 8.1% to $248 million compared with $270 million in the prior year's second quarter. The segment's operating margin declined to 3.3% from 7.1% in last year's second quarter. Darrow stated, "Although our La-Z-Boy branded facilities are operating with a more efficient cellular manufacturing process, our margin was impacted by decreased volumes, rising raw material costs and an increase in advertising and bad debt expenses." Darrow continued, "While we have reduced our capital expenditure plans for the fiscal year, we are committed to moving ahead with projects that are paramount to improving our profitability. Our Mexican cut-and-sew operation is one such project and we are pleased that it is on schedule to come on line in January 2009. With the plant's proximity to the U.S., combined with its lower cost structure, our overall operating costs will be reduced while we supply custom-order cut-and-sewn kits to our domestic facilities. Currently, however, as we are developing the Mexican operation, we are incurring associated costs which impacted our results for the quarter." Darrow added, "As part of our moves to strengthen the company, we announced that 15 to 20 La-Z-Boy Furniture Galleries(R) stores would close, the majority of which are dealer-owned. While we regret having to make these moves, they are necessary in light of the tight credit environment. A portion of the expense taken for bad debts this quarter is related to these stores and, while closing them will impact our volumes going forward, we believe it prudent to allocate resources to more productive stores within the system in an effort to contain future bad debt charges." For the fiscal 2009 second quarter, the La-Z-Boy Furniture Galleries(R) store system, which includes both company-owned and independent-licensed stores, opened one new store, relocated and/or remodeled one and closed four, bringing the total store count to 330, of which 219 are in the New Generation format. For the remainder of fiscal 2009, the network plans to open 10 New Generation format La-Z-Boy Furniture Galleries(R) stores (two new stores and eight will be either remodels or relocations) and, with the withdrawal of credit, it anticipates closing 15 to 20. System-wide, for the third calendar quarter of 2008, including company- owned and independent-licensed stores, same-store written sales, which the company tracks as an indicator of retail activity, were down 4.7%. Total written sales, which include new stores, were down 4.6%. Additionally, same- store written sales for October were down over 17%, reflecting the magnitude of the change to the overall macroeconomic environment. Casegoods For the 2009 second quarter, casegoods sales were $48.5 million, down 17.7% from $58.9 million in the prior year's second quarter. The segment's operating margin decreased to 1.6% from 6.1% in last year's fiscal second quarter. Darrow commented, "With the precipitous decline in our casegoods volume, due principally to the higher-ticket nature of wood furniture groups and our belief the consumer is postponing such purchases, we were unable to maintain our operating margin. Additionally, with our ability to ship product within a 14-day period, our customers are reluctant to take an inventory position in this environment. Further impacting our profitability for the quarter was the fact that our plants worked at less than 50% of their capacity due to the significant decline in volumes." Retail For the quarter, retail sales were $39.5 million, down 14.5% compared with the prior-year period. The retail group posted an operating loss for the quarter, and its operating margin was (26.3%). Darrow stated, "Overall macroeconomic difficulties and record-low consumer confidence levels are impacting the consumer's desire to make discretionary purchases and this negative consumer environment was magnified in our company-owned retail segment, particularly with the higher operating costs associated with the business. In October, we named Mark Bacon as Chief Retail Officer and, in his short time with the company, he has already identified areas for improvement and is making organizational and process changes to the business. Mark brings with him a wealth of retail experience and expertise from his prior associations with Pep Boys and Staples. We are confident he will be able to make a meaningful contribution to our company by improving the performance of the company-owned retail segment even in a challenging sales environment." During the second quarter, the company's retail segment opened one new store and relocated one company-owned store. The company did not close any company-owned stores during the quarter. At the end of the second quarter, the company owned 70 stores, including 58 in the New Generation format. For the third quarter of fiscal 2009, the company-owned segment will not open or relocate/remodel any stores, but will close two locations. Income Tax As a result of losses sustained during the quarter, the impact of the restructuring actions taken over the past three years, the significant decline in current and projected demand for consumer furniture purchases and resulting uncertainty in the economic climate, the company reassessed the likelihood that it would be able to realize the benefit of its deferred tax assets. Due to these economic conditions, it concluded that a valuation allowance of $38.2 million should be recorded against the deferred tax assets, or $0.74 per share. Balance Sheet The company's debt-to-capitalization ratio was 23.5% at the end of the second quarter compared with 24.9% a year ago. Sequentially, the debt-to- capitalization ratio increased from the last quarter as a result of the change in shareholders' equity, driven primarily by the deferred tax valuation allowance. Due to the seasonality of the furniture business, the company's accounts receivables increased $16.5 million to $196.8 million during the quarter, which were funded in part by the increase in our total debt versus last quarter. Additionally, in light of the uncertainty of the business environment, the company made the decision to reduce its quarterly dividend to shareholders from $0.04 per share to $0.02 per share. The dividend is payable on December 10, 2008, to shareholders of record on November 27, 2008. Business Outlook Commenting on the company's business outlook, Darrow said: "The instability that continues to define the overall macroeconomic environment points to the likelihood of a protracted recession. We are particularly concerned with the inconsistency and lack of visibility of our incoming order rates coupled with the consumer confidence index falling to its lowest level on record. With that as a backdrop, the company deemed it prudent to suspend yearly guidance at this time. We will continue to run our business to improve profitability in this uncertain economic environment." Background Information: La-Z-Boy Incorporated is one of the world's leading residential furniture producers, marketing furniture for every room of the home. The La-Z-Boy Upholstery Group companies are Bauhaus, England and La-Z-Boy. The La-Z-Boy Casegoods Group companies are American Drew/Lea, Hammary and Kincaid. The corporation's proprietary distribution network is dedicated exclusively to selling La-Z-Boy Incorporated products and brands, and includes 330 stand- alone La-Z-Boy Furniture Galleries(R) stores and 434 Comfort Studios, in addition to in-store gallery programs at the company's Kincaid, England and Lea operating units. According to industry trade publication In Furniture, the La-Z-Boy Furniture Galleries retail network is North America's largest single- brand furniture retailer. Additional information is available at http://www.la-z-boy.com/.